Price Volatility and Service Interruption Risk-Hedging by Transmission Contract

Abstract

In this paper, we propose a transmission contract for reliability and risk-hedging in the deregulated power system. The proposed transmission contract, which is conducted by the transmission system operator (TSO), is a product of the agreements between the generation company (GENCO), the TSO, the distribution company (DISCO), and the large consumer. The proposed transmission contract results in a certain income of the GENCO and provides an incentive for new investments to meet demand in the future. Furthermore, it can help the DISCO and the large consumer hedge the risks, which are caused by the volatility of the price in the spot market. Additionally, for the large consumer, whose load needs high reliable electricity, the proposed contract gives a guarantee that his or her load will always be supplied, or otherwise, he or she will receive a compensation for the service interruption. The effectiveness, especially from the consumer's viewpoint, is shown by using the simulation based on two market models: pool model and mixed pool/bilateral model.